Definition: The objectivity principle states that financial and accounting information needs to be independent and free from bias. This means that financial reporting like a company’s financial statements need to be based on evidence and not opinions. Obviously, in some areas professional accountants need to express their opinions, but the objectivity principles says that opinions can’t be the sole bases for an accounting treatment.
What Does Objectivity Principle Mean?
Accounting practices in the US are made up of rules, principles, and concepts. These standards are called GAAP or Generally Accepted Accounting Principles. There are a number of different principles that GAAP uses to help maintain a high level of reliance and verifiability in financial reporting. One of these principles is the objectivity principle.
The purpose of the objectivity principle along with all of GAAP is to make financial statements more useful to investors and end users. The objectivity principle, specifically, aids to ensure that financial statements are reliable and verifiable. Reliability means that the financial information is consistent and trustworthy to investors and end users. Verifiability means that the financial information can be proven with evidence and the findings can be duplicated. Both reliability and verifiability give usefulness to the financial statements.
In other words, GAAP is trying to make sure financial statements are based on facts and not opinions or biases. Accountants who have close ties with companies may not be able to work on their financial statements because the accountant might be bias. An accountant who owns stock in a company may want to company to do well. There is obviously a conflict of interest here. This is one of the things the objectivity principle aims to eliminate.